WATCH Bad loans clean-up ordinance: From what it is about, why it was issued and will it work, all you need to know

It will also allow RBI to issue directions to banks for resolution of stressed assets.

Santosh Tiwari, Senior Associate Editor at Financial Express explains how the new amendment to Section 35 A of the Banking Resolution Act 1949 will make things easier for banks to handle the NPA situation now. (Reuters)

Finance Minister Arun Jaitley while addressing a press conference on Friday afternoon announced that an ordinance was passed by President Pranab Mukherjee on Thursday night to amend Section 35A of the Banking Regulation Act 1949. After the ordinance, Section 35AA and Section 35 AB will be inserted in the Act to empower Reserve Bank of India. It will also allow RBI to issue directions to banks for resolution of stressed assets. Jaitley said that sale of assets, closure of non-profitable branches, reduction of overhead and biz turnaround initiatives are part of amendments. Santosh Tiwari, Senior Associate Editor at Financial Express explains how the new amendment to Section 35 A of the Banking Resolution Act 1949 will make things easier for banks to handle the NPA situation now that the RBI is in a better position to direct banks over taking action on stressed assets. However, Tiwari warns, if this resort does not work, it will be a serious problem.

Here is what the ordinance is about and why it was issued – watch the video:

The need for the government to resort to an ordinance arose because the NPAs situation had reached a level that if the government, RBI, and the lending institutions like banks did not take an immediate action, it would affect the economy, explained Tiwari.

Over past few months the government and RBI were grappling with the situation trying to come out with a plan which would immediately start resolution of NPAs. “Laws were there, system was there, but the NPA situation was not getting resolved. In fact it was not improving, it was going from bad to worse according to a CARE rating study, said Tiwari.

By December 2016 banks’ books had around Rs 6.9 lakh crore of NPAs. RBI deputy governor Viral Acharya had said in February that there has to be a time bound way to resolve NPAs. Though the RBI had powers under the Section 35 A of the Banking Resolution Act 1949, to issue guidelines for the banking companies, but they had not been specific. Section 35 AA and Section 35 AB introduced today in the Act, allows the government to authorise RBI to take specific measures to solve issues.

The situation now is that 50 big cases can be taken up together in a time-bound manner in a particular time frame. Committees which will be set up by the RBI will also help banks to know exactly what to do to resolve the NPA issues.